Skip to main content

Competition is fierce among brokers that cater to active traders.

As outfits like

, (,

( and a new entrant scheduled to launch next month,

(, struggle to differentiate themselves, they're rushing out free online tools and services that should make life as a trader a lot easier. They're also paring costs to the bone.

That's great news for traders who might make 20 to 50 rapid-fire trades per day. But these tools and services are attracting less hyperactive traders as well, enabling them to enter and exit trades at the best possible price. The resulting savings can amount to $50 or more for 100-share lots. What's more, the commissions these brokers charge are often equal to or below, say,



( So why not take advantage of the added bells and whistles?

Scroll to Continue

TheStreet Recommends

Join the discussion on


Message Boards.

On the cost front,, for example, has a minimum commission of just 1.5 cents per share (plus fees of a penny or so per share, depending on which ECN -- or electronic communication network, which directly matches buyers with sellers -- you use). The New York-based broker also charges just $50 per month for Level II quotes, which show the entire range of bid and ask prices from market makers, ECNs and individuals.

By comparison, financial-data providers like


( charge roughly $120 a month for a bundle of financial feeds that include Level II quotes. In's case, the $50 charge is simply


monthly exchange fee passed on to you. And unlike many brokers, you don't have to place 20 or more trades per month to qualify -- just maintain a $25,000 account balance.

Brokers that haven't chosen to compete on price are focusing on other unique services, like automated tax recordkeeping and advanced analytical tools. The latter scan market data in real time to identify trading opportunities.

Software Is the Difference

But I'm getting ahead of myself. First, what distinguishes a daytrading or active-trader brokerage from firms like


(AMTD) - Get AMTD IDEA Group American Depositary Shares each representing one Class A Report

( or



For starters, it's the software they use. In the mid-1990s, two major developers,

( and, launched full-featured daytrading programs. Basically, both were desktop applications modeled after the dedicated




terminals used by institutional traders. Like their $1,000-per-month-or-more cousins, the desktop programs gave traders charting, analysis, advanced order entry and real-time portfolio tracking -- but for rental fees of just $200 to $300 per month, or even free if you made a minimum number of trades per month.

Often, locally based daytrading brokerages licensed or software and pasted their own logos on the programs. The software mainly ran on rows of desktop PCs at daytrading rooms around the nation. Somewhat slower versions were used by traders who patched into these trading rooms from their home computers through the Internet. and launched their own brokerage operations as well, hoping to get a bigger piece of this home market.

Direct-Access Trading

One feature the and software pioneered -- and other brokers have begun to copy -- is something called direct access. I'll explain: When you place a trade with, or, soon,, it travels from your home PC to your broker via the Internet, just as with any other online brokerage. But from there, the order bypasses the Internet and travels on a direct connection to the Nasdaq market or the major ECNs.

Contrast that with what occurs when you place an order through most online brokerages using your Web browser. "Orders go to one central location, and then a third-market firm kind of mud-wrestles with the order and the client gets the execution," says Dan Uslander, president of

In other words, direct access bypasses what Uslander calls "third-market" firms, the market makers that expedite trading and profit from the spread between the bid and ask prices.

Brokerages like

and E*Trade have long provided simplified direct access, but usually through a single ECN, such as




. But broker/software packagers like, and offer access to several ECNs along with Nasdaq's small-order execution system (SOES), Nasdaq itself, the

New York Stock Exchange

and other major exchanges.

New Tools

What's more, the and programs come with built-in applications that continuously scan prices on the exchanges and ECNs to give you immediate execution at the best price. These systems can shave fractions of a point from each trade -- which is why daytraders wouldn't survive long without them. has taken the idea of fast, best-priced executions a step further by radically simplifying the order-entry process. Instead of filling up your computer monitor with four or more windows containing charts, news and, say, a scrolling ticker, as heavyweight trading programs tend to do, uses a streamlined 2-inch-by-4-inch screen that floats on top of your browser.

This floating "ticket" is designed for traders who like to get their information from lots of different sources on the Web. For example, you could have a Level II screen open on one corner of your screen with data streaming in from either your broker or a third-party data provider. At the same time, you might be logged onto a chat site like

Silicon Investor

. If the chat and the quotes convince you that, say, a breakout's taking shape,'s floating ticket lets you enter a position quickly.

Of course, the other way to spot a trading opportunity early on is with alerts. And there, too, daytrading brokerages are rushing ever more sophisticated analytical software to your desktop. These products allow you to prescreen for certain variables, such as technical signals, or major volume increases, price gaps, whatever.

The software churns through stock-price data and finds stocks that meet your criteria. It's kind of like having a stock screen that's always turned on so that it uses data in real time. Trading opportunities scroll by on your screen or pop up like the familiar paperclip-bot in Microsoft Office.

Tax Accounting has another killer app in the works: tax accounting. Hold a stock for two years or three minutes and the feature will automatically calculate your capital gains and keep a running tally on a Schedule D tax form. Obviously, this will save active traders hours of onerous bookkeeping time. This service is free.

It's easy to understand why brokerages are so anxious to attract active traders. True, there may be only a few thousand truly active traders out there, but the volume of their trades is enormous. says its 2,500 users trade 20 million shares per day. What's more, investment bank

Chase Hambrecht & Quist

reports's trading volume increased 67% during the third quarter of 1999. And the firm ranks among the top nine online brokers. Last week, the

San Francisco Examiner

reported that was in merger talks with

Charles Schwab


, the nation's largest broker., partially backed by Japanese Internet venture capital giant


, reportedly generates $27 billion in equity transactions per month through its online operations and within the trading rooms of its

Momentum Securities

division. The company claims that figure puts it just behind Charles Schwab.

So, yeah, active-trader brokers are doing what Las Vegas casinos have done successfully for years: comping the high rollers. Just wait until the free applications they're using as bait make their way to mainstream brokers.

Mark Ingebretsen is editor-at-large with

Online Investor magazine and a consultant to a major insurance company. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback at